Central America & Caribbean Growth Accelerates in Q3

February 17, 2016

The economy of Central America and Caribbean picked up pace in the third quarter last year. GDP growth tallied 3.0% on an annual basis, which was up from the 2.6% increase observed in the previous quarter. That said, the momentum is likely to have carried over into the final quarter of the year, as projections show that regional growth accelerated to a 3.9% expansion.

Growth in the Central America and Caribbean region was relatively robust in 2015. However, economic developments remain divergent. A low oil price environment is giving a boost to the oil importing countries. Moreover, countries with closer ties with the United States are benefitting from the gradual recovery of the U.S economy. Conversely, low commodity prices are weighing on the performance of commodity exporting countries.

Economic perspectives remain positive

The economic outlook for the region was unchanged this month, following last month’s deterioration. Analysts participating in February’s FocusEconomics Consensus Forecasts see the region’s GDP increasing 3.1% in 2016. The panel participants left their forecasts unchanged for 7 of the 12 economies surveyed, including El Salvador, Guatemala, and Puerto Rico. Conversely, the GDP forecast was cut for Haiti and Panama. Central America and the Caribbean is set to outperform Latin America, which is expected to grow only a timid 0.1% in 2016. In 2017, the Central American and the Caribbean region is expected to grow 3.2%.

Moody’s credit ratings agency revised Costa Rica’s outlook down from stable to negative, arguing that the fiscal deficit will remain high and that this will result in higher government debt. Moody’s is doubtful that the National Assembly will implement comprehensive tax and fiscal reforms anytime soon since previous attempts to tackle the deficit have been in vain. Moody’s pointed out that the highly-atomized Assembly, with nine different political parties, makes reaching a consensus even more difficult than in the past. Hence, the government’s funding needs will increase and this will put pressure on domestic interest rates and economic growth. On the political front, in the 7 February municipal elections, the opposition National Liberation Party (PLN) won over half of the municipalities. Analysts agree that the results signal a return to the bi-party system that characterized Costa Rican politics in the past and that this may continue ahead of presidential elections in 2018.

Growth prospects are encouraging as domestic demand is expected to remain high and external demand is seen recovering this year. However, structural challenges such as corruption, inadequate infrastructure and a worsening fiscal situation pose downside risks. Analysts see the economy expanding 3.7% in 2016, which is up 0.1 percentage points from last month’s projection. The panel foresees GDP growing 3.6% in 2017.

DOMINICAN REPUBLIC | Economy set to record another year of robust growth in 2016

Data released by the Central Bank show that the economy expanded 7.0% last year. While the figure represented a slight slowdown over 2014’s increase, economic growth remains robust and is broadly supported by healthy government spending and strong fixed investment. An increase in tourist arrivals, foreign remittances and the low-oil-price environment are fueling growth. The country will hold presidential elections on 15 May—nearly two years after the original date due to constitutional changes. The most likely scenario is that incumbent President Danilo Medina, from the Dominican Liberation Party (DLP) will be reelected. His main opponent is opposition leader Luis Abinader.

The economy is headed toward another year of solid growth. An improvement in the agriculture sector and a pickup in external demand will support the economy going forward. Moreover, accelerating growth in the U.S. will also contribute to an increase in remittances. FocusEconomics Consensus Forecast panelists expect the economy to grow 5.2% in 2016, which is up 0.1 percentage points over last month’s projection. For 2017, the panel projects GDP to increase 4.4%.

GUATEMALA | Growth accelerates in Q3 on robust domestic demand

Guatemala’s GDP growth ticked up from 3.4% in Q2 2015 to 3.9% in Q3. The acceleration was fueled by stronger household spending and higher fixed investment, which more than made up for a lackluster external sector and lower public spending. Recent data suggest that economic performance was robust in both Q4 and at the outset of 2016. Economic activity expanded at a broadly-steady pace from October to December and remittances posted the third consecutive double-digit gain in January. Meanwhile, new President Jimmy Morales reiterated that he would give the economy a push by promoting transparency and fighting corruption. He stated that he plans to boost construction and tourism in particular to ensure long-term growth, but he did not provide details on what measures will be used to do so. While many analysts see restoring trust in state institutions as one of Morales’ main challenges, his party’s small representation in Congress, as well as fairly-limited fiscal revenues due to the country’s low tax base, will likely restrain the scope of reforms.

Guatemala’s GDP growth is projected to moderate this year, which mainly reflects uncertainties regarding the path politics will take in the future and the impact this may have on the economy. FocusEconomics Consensus Forecast panelists expect the economy to decelerate slightly to a 3.5% expansion in 2016, which is unchanged from last month’s forecast. For 2017, panelists expect growth of 3.6%.

PANAMA | The Panama Canal expansion expected to open in June

The Panama Canal expansion project is entering the final stages as the repairs to address water leakages in one of the locks were finalized. Panama Canal administrator Jorge Luis Quijano stated that the Panama Canal Authority (ACP) has started conducting technical trials in both locks to determine if the new locks are fully functional prior to the planned opening in June. In addition, the ACP outlined in late January that more than USD 800 million will be invested starting in the final months of 2016 to meet increased canal demand. The ACP is contemplating building a new container port, which is poised to nearly double the container capacity of the country, as well as a logistics park and a liquefied natural gas distribution hub. Quijano stated that these projects should be operational by 2018–2019 and that they will be a crucial step in Panama’s plans of becoming a logistics hub in Latin America.

Ongoing strength in Panama’s diverse service-oriented sectors and substantial public investment will continue to foster growth going forward. FocusEconomics Consensus Forecast panelists expect the economy to expand 6.1% in 2016, which is down 0.2 percentage points from last month’s projection. For 2017, the panel also forecasts growth of 6.1%.

Inflationary pressures in Central America and Caribbean picked up in December. A FocusEconomics estimate showed that Inflation in the region increased from 2.0% in November to 2.5% in December, thus hitting a five-month high. A preliminary estimate points to a further increase of inflation in January.

Forecasters polled by FocusEconomics this month see inflation ending 2016 at 2.8%, which is unchanged from last month’s forecast. The panel cut the forecast for 7 of the 12 economies surveyed, including Guatemala, Jamaica, Panama and Puerto Rico. Projections for the rest of the countries were left unchanged, while Costa Rica and Haiti were the only economies for which analysts raised their forecasts. Panelists expect regional inflation to accelerate and end 2017 at 3.2%.

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